ACCT 301 Chapter 12

Bella Company purchased debt securities with a face amount of $500,000 for $480,000 and classifies them as trading securities. During the first year, the company amortized $2,000 of the associated discount. At the end of the period, the fair value is $504,000. Bella should recognize a fair value adjustment of

$22,000.

Marian Company's records show the following account balances at 2/1/18: Investment in HTM securities, $500,000; and discount on HTM investment, $20,000. On that day, the company sells the investment for $520,000. The journal entry would include credits of

$40,000 to gain from sale of investment. $500,000 to investments in HTM securities.

Marian Company's records show the following account balances at 2/1/18: Investment in HTM securities, $500,000; and discount on HTM investment, $20,000. On that day, the company sells the investment for $520,000. The journal entry would include debits of

$520,000 to cash. $20,000 to discounts.

Which of the following are correct regarding the financial statement presentation of HTM securities?

Gains and losses are shown in net income in the period in which the securities are sold. Unrealized holding gains and losses are disclosed in the notes to the financial statements.

If an investor has the positive intent and ability to hold a debt security until it matures, it should be classified as a(n)

If an investor has the positive intent and ability to hold a debt security until it matures, it should be classified as a(n)

Northern Company has bonds with an amortized cost of $600,000 and a fair value of $675,000. Northern properly classifies these bonds as trading securities. At the end of the reporting period,

Northern will report an unrealized holding gain in net income. Northern will make a fair value adjustment of $75,000.

Which of the following conditions must be present for a debt security to be classified as "held-to-maturity?"

The investor intends to hold the security until maturity and has the ability to hold the security until maturity

If the market rate of interest decreases after a bond is purchased, the bond incurs

an unrealized holding gain

If the market rate of interest rises after a bond is purchased, the bond incurs

an unrealized holding loss

Which of the following are common financial instruments that are used to finance or expand a company's operations?

corporate bonds, preferred stock, common stock

Northern Company has bonds with an amortized cost of $600,000. At the end of the first reporting period, the bonds had a fair value of $675,000. 2 days after the end of the first reporting period, the bonds have a fair value of $680,000 and Northern decides to sell the bonds. The initial investment in the bonds was $700,000 and the discount on bond account has a $100,000 balance. Northern properly classifies these bonds as trading securities. The journal entry to record the sale of the bonds includes

debit to cash $680,000 credit to investment in bonds $700,000 debit to discount on bond investment $100,000 credit to fair value adjustment $80,000.

If a bond sells for less than its maturity value, the bond sells at a

discount

Investments in debt securities classified as trading are reported on the balance sheet at

fair value

Equity and debt securities are commonly referred to as ___________ instruments

financial

Cash flows from buying and selling held-to-maturity securities are typically classified as _____ activities on the Statement of Cash Flows.

investing

If the interest rate paid on a bond is lower than the market interest rate, the bond will sell for an amount that is

less than its maturity value.

Characteristics that support classification of investments as trading securities include

motivation to realize short-term profits. frequent and active trading.

If a bond sells for more than its maturity value, the bond sells at a

premium

If a company holds bonds that are not actively traded, it can estimate the fair value of those bonds by using ___________ techniques

present value

The price of a bond is equal to the

present value of future cash receipts.

The price of a bond is equal to

present value of future interest payments plus present value of principal

An investor who purchased corporate bonds that are not publicly traded may estimate the bonds' fair value by determining the

present value of the future cash flows

Unrealized holding gains and losses associated with debt investments properly classified as "available for sale" are

recognized as other comprehensive income.

Jones Financial Institution buys and sells debt securities frequently to maximize short-term gains in market value. Jones should classify its portfolio as

trading securities.